Debt Consolidation Loans - A Double Edged Sword

The "Single Payment" - A Danger?

Another point to consider is that, by signing for a consolidation loan, you will be faced with a single payment to a single creditor, rather than smaller payments to several creditors. While this can be very beneficial, the problem here is that one large payment can be a more difficult payment to make. And, if you are a mere one dollar short on this one large payment, your account is considered in default.

Obviously, being a little short may not result in foreclosure or legal action, but late fees and penalty charges will start, and non-payment by even that little will cause your lender to watch your account a little closer. Additional fees can make it more and more difficult to catch-up to payments, and with each successive payment you can in fact fall further behind. Before long, it is possible that you could be considerably past due - resulting in, you guessed it, legal action or foreclosure.

You Have A Choice
Not signing for a consolidation loan gives you options with your creditors. For instance, if you have difficulty making all payments, you can at least make selective payments to the creditors that are more important.

For example, your mortgage would be first priority, because it is secured debt, a card with a 30% rate might be second, and so on down the line. The fact is, unsecured creditors such as credit card companies and medical facilities, are least likely to take legal action against you. Lenders offering consolidation loans, however, are quite prone to doing this. It is the dark secret of the financial industry that few will admit to.

Solve The Problem, Then Build It Up Again

Another large problem with consolidation loans is that borrowers are generally allowed to keep their credit cards. Having access to these cards, debtors often fall into the same trap - charging many of their purchases and/or expenses. Often, before they realize it, these charges start to build. In addition to having to make their consolidated loan payment, now they must again make a credit card payment. Short of funds, eventually they take cash advances to make their payment, thus only increasing their debt. It becomes a vicious cycle, until finally bankruptcy is the only alternative.

While a debt consolidation loan may be the right decision for some consumers, it may lead other consumers to financial ruins.

Read Part III - Home Equity Loans and Second Mortgages.

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